Cotton flow, identifying bottlenecks, finding solutions

While the top attention-getter, market price is only one consideration for the cotton industry. Also high on the list is the need to improve bale movement.

Streamlining cotton “flow” is largely what Shane Stephens spoke about at the mid-July Southern Cotton Ginners Association (SCGA) meeting in Little Rock. Stephens is Vice President of the National Cotton Council (NCC) representing warehousing, as well as Vice President of Staplcotn warehousing. Among other things, he also serves on the NCC’s Performance and Standards Task Force (PSTF).

“This is the second go-round for the PSTF,” said Stephens. “The first was back in 2006, resulting in recommendations to the cotton industry that, after receiving industry wide acceptance, improved the flow of U.S. cotton. BMAS (Bales Made Available for Shipment) reporting, 4.5 percent minimum weekly shipments, maximum storage forgiveness rates, loan transfers, and a 75 day limit on loan transfer storage forgiveness were just some of the flow improvements accomplished.”

Now, further fixes are needed.

“Some of the same flow problems need to be addressed. We’ve had flow issues for the last four or five decades – in reality probably as long as we’ve grown cotton in this country.”

Among Stephens other comments:

On developing cotton flow recommendations…

“In recent years we’ve made great strides in improving the access to and reliability of U.S. shipments of cotton. But that doesn’t mean there’s never a bottleneck or lost value due to delays. There certainly have been.

“We can still make system-wide improvements that will make U.S. cotton more competitive. That’s the reason for the NCC task force re-forming this spring. We’ll meet again (on August 10).

“Hopefully, this industry-wide committee, chaired by ginner Bobby Greene, can develop recommendations for the NCC board to consider at its mid-year meeting the end of (August).

“After the first task force finished its work and had concrete recommendations for our industry, I had the pleasure of speaking to … the Southern Cotton Ginners Association, and explaining those recommendations. This time around, my presentation refers to the latest PSTF proposals developed for industry segment deliberation. Specifically I addressed the Cotton Growers Warehouse Association and National Ginners responses.”

Nuance and intricacies

On nuance and intricacies…

“It’s hard to sum these things up in a nice, clean package. There are lots of nuance and regional intricacies and not a one-size-fits-all approach. It’s more complicated than what appears on the surface due to our industry’s diversity.

“The main point, though, is this: we’ve complained about the flow of cotton for at least 40 years. We’ve made improvements but why haven’t we solved the problem. The answer I think may be: we haven’t sent the correct economic signals.

“The cotton industry doesn’t send the needed signal to a warehouse to cause it to perform beyond the minimum standard or a warehouse’s customary outbound volume. Unfortunately, we send a disincentive.”

On incentives and rewards…

“The truth is, the minimum standard is pretty high – 4.5 percent of a warehouse’s registered capacity must be made available for shipment at any given week. The word ‘minimum’ isn’t insubstantial.

“But what happens to warehouses that do more? Well, we penalize warehouses that perform at higher levels than the standard by increasing their cost and lowering their revenue and in turn reward poor performers by letting them continue to collect storage charges.

“I don’t think it will be acceptable to the entire cotton industry to continue raising the minimum standard, as we did the last two decades when addressing flow complaints. Some players just won’t participate.

“The problem is when you penalize the ‘good’ players and reward ‘not-so-good’ players there will be a migration of volume to the ‘not-so-good’ side of the ledger. That’s just common sense because the bales will move to where they’re economically rewarded.

“What do we want? We want U.S. cotton to be more accessible and more economical through service and dependability for the world’s textile mills.

“How to do that through cotton flow? Well, we can move more cotton, quicker, when the market dictates that’s necessary. The market sends economic signals to the shipper and grower that come in loud and clear. For example, when December futures are 10 cents higher than March, the market is telling the shipper ‘turn your cotton into cash now. If you wait, I’ll pay you less and you’ll get to pay additional storage and interest.’ That part of the equation seems to be working.”

On economic signals…

“But where is the economic signal to the warehouse?

“To address that, the idea of adding a ‘second tier’ of an additional percentage of capacity the warehouse will make available for shipment is being considered. While other items are certainly on the table it seems this additional BMAS volume, for a fee, is the main idea in play.

“If this concept works, we’d have a second shipping tier so that when a warehouse is able to ship more than the standard 4.5 percent, it would actually have an incentive to do so. The additional fee associated with this second tier of BMAS would help make more cotton available above and beyond what has been reasonably expected and reward those warehouses able to meet higher demands.

“The shipper wouldn’t have to pay any additional fee unless they first request a warehouse to perform above their current 4.5 percent BMAS standard. If they want or need faster service and the warehouse is in a position to meet extremely high demand – we could have a fee structure that rewards the warehouse for shipping say 6.5 percent or even higher levels. While not free of some cost, this proposed system, if widely utilized, can certainly remove the warehouse component as a major concern of U.S. cotton flow.

“Why not just raise the standard to 6.5 percent? That’s what many industry participants would like to see. We don’t believe that will be economical, on the whole, because every warehouse in the country would be required to increase its trained personnel, equipment and staging space to meet this new standard even though history tells us it will be rarely or sporadically utilized.

“Over the last decade, only a few warehouses on a few occasions have been asked to ship amounts higher than our current standard. So, by raising the standard, we wouldn’t make U.S. cotton more competitive. The net effect is that it will be less competitive by adding costs to the system at every warehouse for the entire year.

“At Staplcotn, we are a large shipper and exporter, as well as a cotton warehouse company. We have the same issues to deal with as other merchandizing firms. We do have flow issues and the shipping community is working hard to be responsive, efficient and economical, doing its job, pointing out inefficiencies and demanding improvements. If we can address flow bottlenecks in a positive way our entire industry will win!”

Apples to apples

Any other cotton-producing country that is facing the same issue and tackled them differently?

“An excellent question.

“And, yes, my guess is all cotton-growing areas face flow problems.

“But when you compare access to cotton by country, make sure you’re comparing apples to apples. Sometimes we compare, for example, the ability to move French West African cotton already in a port and staged for shipment in blocks, to cotton that is still in country warehouses in the United States that will be picked by individual bale number. That’s not apples to apples.

“The U.S. system is designed so the farmer/gin relationship dictates which warehouse the cotton is stored in without much, in most cases, input from the shipper. Of course, there are exceptions but under this common practice the shipper finds themselves with little influence when asking for exceptional or higher than standard performance.

“That’s why we’re trying to figure out a tiered system. Then a shipper can say ‘yeah, I know you normally ship 4.5 percent of capacity per week and I’m asking for volume in excess of that, so charge me an expedited fee but ship my cotton. The proposed fee should at least cover the warehouse’s increased cost and loss revenue associated with the exceptional service while still being economically justifiable from the shipper’s position? If a system like I described can be put in place, both companies win and more importantly U.S. cotton wins.”

On understanding each segment of the cotton industry…

“Remember the warehouseman is no different than the merchandiser or textile mill – he’s responsible to the people who invested capital in his operation to run an efficient business. How long will that warehouseman be around if he plans to ship at high volumes that he rarely receives request for? He’s gone.

“Occasionally it seems there is a belief that just because bale data, as electronic blips on a computer screen, can be moved very quickly that bales likewise can zip to a ship headed across the ocean. Unfortunately, we all really know it doesn’t work that way – physical bales take time, trained labor, equipment, and fuel to stage, prepare, and load.

“Frequently, even though the warehousemen wants nothing more than to give the shipper his requested load dates they find themselves constrained by the available equipment, personnel, and facility limitations associated with bunched shipping orders.

“Will paying for expedited delivery during heavy shipment periods help the flow situation? Certainly, but probably not to the extent of solving all flow issues or delayed deliveries but it will put a big dent in our current problem. If we create a system that sends a timely economic signal to the businessmen, that are running our cotton warehouses, I am confident they will spend the necessary money to gear up and make more cotton available for shipment during peak demand periods. We may not get 100% of the desired cotton on the exact date requested, but I bet it won’t take 120 days, either…

“We need to tweak our system so it sends an economic signal of reward for the desired performance. Right now, that isn’t always the case.”